15-1 ©2008 Prentice Hall, Inc.. 15-2 ©2008 Prentice Hall, Inc. ADMINISTRATIVE PROCEDURES (1 of 2) ...

15-1©2008 Prentice Hall, Inc.

©2008 Prentice Hall, Inc. 15-2

ADMINISTRATIVEADMINISTRATIVEPROCEDURESPROCEDURES (1 of 2) (1 of 2)

Role of the IRSAudits of tax returnsRequests for rulingsDue datesFailure-to-file/pay-penaltiesEstimated taxes

©2008 Prentice Hall, Inc. 15-3

ADMINISTRATIVEADMINISTRATIVEPROCEDURESPROCEDURES (2 of 2) (2 of 2)

Other more severe penaltiesStatute of limitationsLiability for taxTax practice issues

©2008 Prentice Hall, Inc. 15-4

Role of the IRSRole of the IRS(1 of 2)(1 of 2)

Enforcement of tax lawsCollection of taxes dueInterpretation of Internal

Revenue Code

©2008 Prentice Hall, Inc. 15-5

Role of the IRSRole of the IRSOrganization of the IRS (2 of 2)Organization of the IRS (2 of 2)

Commissioner/Deputy Commissioner

Shared Services Functional Units Operating Divisions

Agency Wide SharedServices 4,900 employees

Agency Wide Info SystemsServices 7,000 employees

Appeals1,900 employees

Taxpayer AdvocateService 1,600 employees

Criminal Investigation4,500 employees

Wage & InvestmentIncome 21,000 employees

Small Business & SE39,000 employees

Large & Mid-sizeBusiness 9,500 employees

Chief Council2,600 employees

National Office Staff1,000 employees

Tax Exempt & Gov’t Entities2,800 employees

©2008 Prentice Hall, Inc. 15-6

Audits of Tax ReturnsAudits of Tax Returns(1 of 3)(1 of 3)

Type of Return Audited

2004 2003

Individual returns 0.93% 0.77%C corporations 1.24% 0.71%Partnerships 0.33% 0.26%S corporations 0.18% 0.19%Fiduciary 0.12% 0.12%Individuals > $100K

inc1.41% 0.99%

Corps w/ assets>$250M

44.1% 20.0%

©2008 Prentice Hall, Inc. 15-7

Audits of Tax ReturnsAudits of Tax Returns(2 of 3)(2 of 3)

Document matching100% audit rateE.g., wages, interest, state income taxes,

real estate taxes, home mortgage interestReturns selected for audit by

discriminant function & other means29% of returns selected by using DIFNRP exams less intrusive than TCMP

Lifestyle audits

©2008 Prentice Hall, Inc. 15-8

Audits of Tax ReturnsAudits of Tax Returns(3 of 3)(3 of 3)

Types of auditsCorrespondence auditOffice auditField audit

Appeals processBurden of proof

©2008 Prentice Hall, Inc. 15-9

Appeals Process(1 of 3)

Taxpayer first meet w/ revenue agent

If taxpayer disagrees w/ findings, IRS sends thirty-day letterTaxpayer has 30 days to request a

conference w/ appeals officerTaxpayer meets with appeals officer

©2008 Prentice Hall, Inc. 15-10

Appeals Process(2 of 3)

If no agreement with appeals officer reached, IRS issues ninety-day letterTaxpayer has 90 days to file petition w/

Tax Court or pay the taxTaxpayer must pay tax first to litigate

in either District Court or U.S. Court of Federal Claims

©2008 Prentice Hall, Inc. 15-11

Appeals Process(3 of 3)

Either party may appeal court decision to Circuit CourtUsually final appeal as Supreme

Court rarely hears tax cases

©2008 Prentice Hall, Inc. 15-12

Burden of Proof(1 of 2)

In civil court cases burden of proof on factual matters shifts to IRS if taxpayer does all of the following:Introduces “credible evidence”Complies w/ recordkeeping &

substantiation requirements of IRC

©2008 Prentice Hall, Inc. 15-13

Burden of Proof(2 of 2)

Burden of proof (continued)Cooperates w/ reasonable

requestsQualifies as a natural person or

legal person w/ net worth $7 million

©2008 Prentice Hall, Inc. 15-14

Requests for RulingsRequests for Rulings(1 of 2)(1 of 2)

Allows taxpayer to learn how IRS will treat a particular transaction before the transaction is completed

Request made in writingIRS has option whether or not to

respond

©2008 Prentice Hall, Inc. 15-15

Requests for RulingsRequests for Rulings(2 of 2)(2 of 2)

When rulings are desirableTransaction is proposedPotential tax liability is highLaw is unsettled or unclear

©2008 Prentice Hall, Inc. 15-16

Due DatesDue Dates(1 of 2)(1 of 2)

Returns for individuals, fiduciaries and partnershipsFifteenth day of fourth month

following year-end of entityC corporations and S corporations

Fifteenth day of third month following year-end of entity

©2008 Prentice Hall, Inc. 15-17

Due DatesDue Dates(2 of 2)(2 of 2)

Extensions availableAutomatic 6-month extension

generally availableMay request additional time if out of

countryTax must be paid by original due date

to avoid penalties even if on extensionInterest due on tax not timely paid

©2008 Prentice Hall, Inc. 15-18

Failure-to-File/Pay-Failure-to-File/Pay-PenaltiesPenalties

Failure to file penalty 5% per month of net tax due; 25% maxFraudulent failure to file is 15% per

month; 75% maxFailure to pay incurs a penalty of 0.5%

per month up to 25%Failure to pay + failure to file = 5%/mo

See Topic Review C15-1

©2008 Prentice Hall, Inc. 15-19

Estimated TaxesEstimated Taxes(1 of 2)(1 of 2)

Taxpayers receiving non-wages/salary income should pay quarterly estimated tax installmentsE.g., interest, flowthrough income,

dividendsPayments should equal lesser of 90% of

tax due or 100% (110% if AGI > $150K) of last year’s tax

©2008 Prentice Hall, Inc. 15-20

Estimated TaxesEstimated Taxes(2 of 2)(2 of 2)

Penalty for underpayment of ES taxes based on interest on underpayment times amount of time outstanding

Exceptions to penalty<$1,000 underwithheldNo taxes owed during prior year

©2008 Prentice Hall, Inc. 15-21

Other More Severe Other More Severe PenaltiesPenalties

(1 of 3)(1 of 3)

Negligence penalty (underpayment)Due to negligence or disregard of

rules/regs w/o intent to defraud 20% of underpayment

Substantial understatement > of 10% of tax liability or $5,000

$10,000 for a C corp20% of underpayment

©2008 Prentice Hall, Inc. 15-22

Other More Severe Other More Severe PenaltiesPenalties

(2 of 3)(2 of 3)

Civil fraudIRS has burden of proofSystematic omission from gross income

or fictitious deductions or dependency claims...

Civil fraud penalty is 75% of portion of underpayment attributable to fraud

©2008 Prentice Hall, Inc. 15-23

Other More Severe Other More Severe PenaltiesPenalties

(3 of 3)(3 of 3)

Criminal fraudIRS has burden of proofProsecution may result from willful attempts

to evade any tax, willful failure to file or willfully making returns taxpayer does not believe to be true and correct ...

Maximum penalty is a fine of $25,000 ($100K for corp), five years in jail or both.

©2008 Prentice Hall, Inc. 15-24

Statute of LimitationsStatute of Limitations(1 of 2)(1 of 2)

General 3-year rule3 yrs from later of due date or date

filed6-year rule for substantial omissions

Applies if gross income omitted >25% of gross income shown on return

FraudNo statute of limitations

©2008 Prentice Hall, Inc. 15-25

Statute of LimitationsStatute of Limitations(2 of 2)(2 of 2)

No limitation period if return not filedRefund claims

Taxpayer not entitled to refund for overpayments unless claim for refund filed by later ofThree years from date original return is filed, OR

Two years from date they pay tax

©2008 Prentice Hall, Inc. 15-26

Liability for TaxLiability for Tax(1 of 2)(1 of 2)

If spouses file a joint return, liability for taxes is joint and severalGovernment can collect from either

spouse regardless of who has income

Tax may be collected from transferees and fiduciaries

©2008 Prentice Hall, Inc. 15-27

Liability for TaxLiability for Tax(2 of 2)(2 of 2)

Innocent spouse relief available if all met:Innocent spouse (IS) files joint returnUnderstatement due to other spouse’s

erroneous item(s) of filing returnIS did not know or had no reason to know of

understatementInequitable to hold IS liableIS elects relief w/in two years after IRS

begins collection efforts

©2008 Prentice Hall, Inc. 15-28

Tax Practice IssuesTax Practice Issues(1 of 2)(1 of 2)

Tax preparer penaltiesIRS may impose various penalties on

tax return preparers for misconductTreasury Department Circular 230

Regulates the practice of attorneys, CPAs, enrolled agents, and enrolled actuaries before the IRS

©2008 Prentice Hall, Inc. 15-29

Tax Practice IssuesTax Practice Issues(2 of 2)(2 of 2)

Tax accounting and lawAccountants must be careful to avoid

the unauthorized practice of lawAccountant-client privilege

Similar to attorney-client privilege, but it only applies in very limited circumstances

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15-30©2008 Prentice Hall, Inc.